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Although some of the most progressive research is coming from military/security analysts, I fear that certain aspects of energy security (and most especially the matter of fuel emergencies) are being largely overlooked by civilian and military authorities alike.

An Energy Security thread was started at Armed Forces Journal last October because I wanted to put the relevant research before a primarily military/security audience (primarily to ensure that they are aware of it, but I also hope to receive input from this audience).

To make it easier for SWC members, I will start re-posting some of the AFJ info here, but in the meantime I would invite you to examine the info at AFJ:http://www.afji.com/forums/
Please click on General, then on Energy Security (usually the first item)

My hope is that this topic will be of interest to SWC participants.
Thanks very much for considering this.

Welcome, Rick -- and thanks

Peak oil: selected military studies (2007-8)

During the next few days I will post information & links regarding various aspects of energy security.
I will begin with four articles by military analysts who view peak oil as a legitimate concern.
"Peak oil" refers to the point when global oil production reaches its maximum. With current global consumption having reached a thousand barrels a second at reasonably affordable rates, any constraint to the availability of cheap oil is expected to present some significant difficulties.

The following four studies may be of particular relevance to this audience:

The “peak oil” point will inevitably be reached, and the concern is legitimate. The extensive discussion of “peak oil”, however, may distract from equally legitimate and far more immediate concerns.

We all know that the easy oil has already been exploited, and that future capacity increases will require very large investments, high production costs, and extended time lags between investment and production. In theory, high oil prices should provide both the means and the incentive to support these investments. In practice, investment is far lower than it needs to be to support probable increases in demand.

National oil companies in many oil producing countries are managed according to political, not economic, rationales. In many cases political and social projects receive priority when oil revenue is allocated, and investment in oil production is often insufficient even to sustain current production levels, let alone to bring new capacity into play. In theory private investment should be able to make up the gap, but very large investment requirements, extended recovery horizons, very high levels of political and conflict risk and generally inhospitable investment climates in areas with high potential are major obstacles to private investment.

High oil prices should drive a wave of investment, but non-economic investment constraints have distorted the process and reduced investment to a level that may not be sustainable. A very high proportion of current investment in new capacity is in the GCC, which only increases the current global dependence on a single group of producers located in an area subject to very real security threats.

This investment gap actually delays the onset of the “peak oil” point, as it leaves more oil in the ground. It also creates problems of its own. I’d hazard a guess that the next great energy crisis will not be driven by an apocalyptic “peak oil” scenario where the oil simply runs out, but by a combination of increasing demand, reduced output due to insufficient investment, and political and/or conflict-related disruptions in one or more major producers. This is not as dramatic a scenario as “peak oil”, but the potential security impact could be severe and the probability of such a scenario appearing in the short to medium term is quite high.

A view from over here

Energy security issues get irregular attention in the UK and most are blissfully unaware that North Sea oil is running out. Natural gas is now being imported, hence the need for storage facilities and the IPPR report recommends more investment. Use of coal on the previous scale (i.e. 1980's) for power generation is unlikely and UK coal is reportedly too "dirty" for current environmental standards.

Meantime let us place our heads and wallets carefully back in the sand.

Peaking vs running out, & UK dilemma

Dayuhan,
I agree completely on your concerns re investment, which confirm the following point: price volatility may be worse than sustained high prices.

If high prices were sustained (prices would need to be sustained for at least a decade in order to achieve the following benefit) then more of the difficult oil would be brought on-stream, thus buying us some much-needed time to develop non-carbon alternatives.
However, a see-saw effect where the price dips regularly subvert such efforts will make investors reluctant to risk their money on something which cannot endure many consecutive months of losses.

But your final point about “an apocalyptic peak oil scenario where the oil simply runs out” makes me wonder if you share a common misconception about peak oil, which is to equate peaking with running out.

This is a very important distinction.
Some peak oil analysts argue that the peak (ie. point of maximum production/flow-rate) should coincide more or less with the half-way point. That is, production will peak when we have extracted about half of the ultimately recoverable reserves.
Personally, I see no causal link between the two, nor did Brent Fisher in his excellent study for the Institute for Defense Analyses (IDA).

But the main point here is that peaking is not about running out, any more than the start of commercial extraction in 1858 (here in Canada, not in Titusville the following year) was about running out.

My bet is that we will have more than half the potentially extractable oil in the ground when we peak., so physical supply may not turn out to be the primary problem after all.
But the central thesis of the peak oil analysts is this: the troubles will start as we approach the apparent peak. It probably will matter little what combination of factors ‘causes’ the peak, and we could have serious difficulties simply from the perception of a peak, even if the perceived peak should later prove to have been a false alarm.

But I agree with everything else that you have said, including the scenario that you describe in your final paragraph.

David in the UK,
I am in regular contact with several UK analysts, both military and civilian.
Your nation seems to be awakening to the unhappy brevity of fossil fuel supply: from having little domestic production other than coal, to the sudden discovery of the wondrous North Sea oilfields, to Mrs. Thatcher’s gung-ho approach to extraction, to the sudden realization that your one-time bonanza had peaked within a generation, and finally to the stark realization that the UK will forever be an importer of oil & gas…. all of this within half a lifetime.

To the UK’s credit, at least they are taking a serious look at how one might manage fuel emergencies, which is more than we can say in North America, where fuel emergencies are barely on the radar.
Brits learned in Sept. 2000 just how problematic a liquid fuels supply problem can be, but here in Canada we have had no such experiences.
We are very complacent….

Three new UK Fuel Emergency plans

This morning I worked my way through three recent UK documents:

1. DECC's Business Continuity Management for Fuel Shortages (Nov. 08)

This brief document (10 pgs) contained the observation that local fuel supplies "could be exhausted within 48 hours of an incident and it could take up to 10 days before stock levels are fully restored" (p.2).

DECC's Maximum Purchasing Scheme would limit purchase for non-essential users to maximum 15 litres (roughly 3 gallons).
This strikes me as a bad idea for two reasons:
1. History: In USA during the 1979 crisis they limited purchases to $5 max, a similar volume. As Yergin states, "The results were exactly the opposite of what was intended, for it meant that motorists had to come back to gas stations that much more frequently" (The Prize, p. 692).
2. Common sense: People will want to top up their tanks as soon as they have gone 75 miles or so.
Topping-up creates line-ups which waste time & additional fuel and increases tensions at the pumps.

Better to have a fixed limit, say 30 litres, no more and no less.
That will reduce topping up.
Emergency pricing will do the rest of the job....

At 30 pages, this is the most comprehensive of the three documents.
It contained a few interesting observations:
- In the aftermath of Hurricane Katrina, health facilities had power and their lights acted as a beacon (literally) for displaced citizens, and this created some security issues for those facilities.

- This doc has several warnings not to underestimate the complexities of a fuel shortage, which is prudent.

- The "Myth of a Central Fuel List" (p. 14) is interesting... it indicates how seriously businesses view their fuel supply and gives a hint of the efforts that people will go to in order to gain preferential access/Essential User status.

- The recommendation to "attempt to have all workers try public transport options" (p. 14) of course makes sense, but as Kathy Leotta points out, "Transit systems have only limited capabilities for quickly increasing services... due to a small supply of extra vehicles and drivers" (p. 4).
Switching to public transit will be easier said than done.

- Other than its request that "all unforecasted costs... are captured for audit" (p. 17) there is little acknowledgment of the budgetary concerns which could quickly arise. It seems highly unlikely that any free-market economy could have an extended fuel supply problem without also having an extended price spike.
Here is the link:http://www.dh.gov.uk/en/Publications...ance/DH_089955

3. Heart of Birmingham NHS Fuel Shortage Plan (reviewed June 27/09)

I found this 21-page plan to be the most intriguing of the three since it addresses some of the significant details of managing the Temporary Logo Scheme (p. 4-5), issues around communicating info to the public (p. 6), concerns about supply chain failures, etc.

Returning to the topic of budgetary problems arising during a fuel emergency, it is puzzling to see no warnings in any of these three documents that pricing during a fuel emergency could prove problematic to their budgets and/or to the service delivery capability of their agencies.
In the Birmingham document, the topic of Financial Implications (Sect. 12.0) is raised, but this section contains a single unfathomable sentence: "There are no significant financial implications anticipated in the implementation of this plan" (p. 13).

Both NHS documents contain some specific and sensible recommendations for personnel, for delivery of services, accountability re fuel use, etc.
One would think that this would surely require some rather detailed consultation with staff (and subsequent training) in order to implement these recommendations.
Here is the link:http://www.bpcssa.nhs.uk/policies/_h...cies%5C881.pdf

4. Some final comments

To their credit, the UK planners have recognized two central facts:
1. a fuel emergency can be a whopper of a problem, and
2. fuel supply and other emergencies must be addressed at the local level first, hence the need for local plans, pre-authorization & empowerment, etc.
Here in North America, there seems to be little awareness of either fact, and therefore precious little action, especially at the local level.

I fear that even the UK planners may be overlooking the issue of price spikes, the resulting budgetary constraints & economic difficulties, and the potential threat to civil order.

In Russia's case, the crisis has clearly profoundly damaged both the overall economy and the energy sector. Russia's stock market is down around 75 percent, its officials project a 2.2 percent contraction of gross domestic product in 2009, and the Central Bank has already spent more than $200 billion, one-third of Moscow's reserves, trying (largely without success) to defend the value of the ruble, now down by one-third against the dollar. At the same time, Russian officials admit to $130 billion in capital flight in 2008, with the true figure possibly significantly higher.

The state gas monopoly Gazprom also faces growing pressure as prices tumble in the European market, which provides an estimated two-thirds of the company's profits.

Gas shortages, EU solidarity and North American unpreparedness

Thanks for your posting, Surfer.
Paul Saunders' point is well taken: the combination of a struggling Russian economy and low gas prices means less ability for them to invest at their end to ensure European winter heating.

My focus is more at the other end... how can people plan for and best administer a fuel shortage.
The following may be of interest as the same principle (of solidarity in burden-sharing) is a cornerstone of international response to an oil supply shortage.

European solidarity was briefly tested during the January 09 cut-off of Russian gas, but the result was hardly encouraging.
A few weeks later, the former executive director of the IEA, Claude Mandil said that a central lesson learned from the crisis is, “Solidarity is still just words.” He went on to cite the example of Italy, saying, “Italy doesn’t care for a second for the global supply of Europe, which is the exact opposite of European solidarity.”
The full transcript is here:http://www.euractiv.com/en/energy/ma...article-179254

Should this winter prove to be a cold one, Europe will be worried.

Meanwhile, we North Americans need to thoroughly examine this issue. Should anything interfere with our supply of affordable fuel (whether liquid fuels or gas) during the Canadian/North Dakota winter, we would have a most formidable problem on our hands... one which (like Ice Storm '98, which knocked out our electricity in January) must be dealt with at the local level.
The problem is that when it comes to fuel, we have no local plans.

The Brits and Australians are onto this in a serious way, and they barely have a winter.
We North Americans don't believe it will happen over here.
Thanks for your interest.

Energy security...

Originally Posted by Rick M

My focus is more at the other end... how can people plan for and best administer a fuel shortage.
The following may be of interest as the same principle (of solidarity in burden-sharing) is a cornerstone of international response to an oil supply shortage.

Rick,

Thanks for the links and conversation. My interest in energy security was certainly energized by a tour in Iraq (sorry, couldn't resist ).

At a marco level mapping is a powerful tool to use in gaining a better of understanding the of condition, needs, and capabilities of centralized energy infrastructure. My dirty boots experience in Iraq (03-04) was counterintuitive when compared to the typical emergency response that we would mount in the west.

Decentralization was the name of the game for energy requirements in Iraq. There are of course added costs and inefficiencies for an economy as a result of decentralization, however as an Iraqi if you wanted to have water, electricity, and fuel you could not count upon the Government to deliver it.

Blackmarket activities were prevalent, gas stations were dangerous places, and 'normal' economic activities were thoroughly disrupted. If one had money one would purchase a cheap generator (often Chinese brands - Caterpillar was big money and usually only seen in government applications) and sell electricity to nearby neighbors. Some of the families I visited would head out to the nearest watermain, dig a hole in the street, shoot a hole in the pipe (cross-contamination was prevalent due to open channel conditions), run a rubber hose back to a small pump attached to a large aluminum box in the courtyard and wait for the watermain to be filled (every 7 days or so where I was at). Others would contract with a water truck entrepreneur for deliveries. Cooking was done by propane canisters delivered by huge trucks at centralized locations.

Early in my tour (generators were not yet prevalent) I visited with some farmers near the Euphrates. They had dug rectangular pits/wells down to the water table and had mudbrick wellhouses nearby for irrigation. The centralized electricity was out and we brainstormed solutions...I shared a trick I have seen which involves pulling a tire off a car rim, while the car is on blocks, and running a band between rim and pump to power the pump (run the car while its on the blocks)...

Holstein No. 2699 gazes warily over Shawn Saylor’s shoulder. The 39 other cows lining the stainless-steel stalls of the milking parlor at Hillcrest Saylor Dairy Farm appear unperturbed—by two strangers or by the vacuum pumps being swiftly attached to their udders. “They’re very particular,” notes Saylor, a fourth-generation dairy farmer. “Everything has got to be consistent.” No. 2699 gives one last measured look from under long lashes, lifts her tail and ejects a stream of runny, brown energy that, very soon, will help power the farm.

Most people don’t think of manure from 600 cows—18,000 gal, produced daily—as an asset; Saylor’s neighbors in Rockwood, Pa., certainly didn’t. Until two years ago, the waste was pumped to a holding pond on the property and spread on the fields every spring and fall. “You’d see a 2-ft crust floating down there that you could pretty much walk across,” Saylor says matter-of-factly. “The odor was unbelievable.”

A lot of people might not see a 50-gal drum of used cooking oil, flecked with bits of fried chicken, as a resource either. That’s why I asked my uncle, Dave Hubbard, to drive me here from West Virginia in his biodiesel Jetta TDI. Uncle Dave converts the waste oil from local taverns into fuel to run his car, a motorcycle and tractors for five farms, so I figured he and Saylor could trade tips.

Saylor, 35, is both practical and inventive—much like Uncle Dave. Above the Leatherman clipped to his belt, the sleeves of a well-worn blue work shirt are rolled up to the elbows; his face dimples from smiling even as he talks shop in the milking parlor. “There’s a recycle–flush system here,” Saylor says, activating a pump. Water recovered from other uses cascades across the floor, sweeping manure in murky streams down the length of the barn and into a tank at the mouth of an anaerobic digester.

Fuel & Food

Thanks again, Surfer... interesting stuff.

The rear-axle & drive-belt idea was of course standard on the old steam tractors 100 years ago and had all sorts of applications (except the tractors came with an elevated side wheel for that purpose).

It's interesting that the pioneers over here in alt-energy and organic ag are so often of Swiss/German background... meticulous in their "attention to detail."

We need more of this, much more, but most Canadian farmers are low-income and lack the investment to undertake such projects.

Meanwhile, farmers are only 2% of the population (same in USA, I believe) and on-farm energy use is only about 10% of energy use in the agri-food sector overall. Most agri-food energy use is for transportation, processing, packaging, refrigeration, etc.

Part of the reason for the UK focus on the "localization" of emergency response is because the panic buying of fuel and food typically occurs by local people stocking up at their local pumps and supermarkets. Supplies which could & should last many days can be depleted in 48 hours, thus greatly exacerbating an already difficult situation. The prevention of hoarding and the administration of more prudent measures can best (only??) occur at the local level.

(But I will state this again: North America has not yet moved in this direction. Actually, here's a challenge for SWC participants: please phone your local and state Emergency Management Office and ask if they have a plan for fuel shortages/oil supply emergencies. They will have plans for pandemics, nuclear attacks & hazardous spills, etc, but no regime to allocate fuel to the public during a fuel crisis. They will probably also indicate their surprise at your enquiry.
Please let this forum know if anyone finds info to the contrary.)

Defence Academy is a research arm of the UK military, and one of their researchers has done an excellent job of examining the UK food supply chain, including the vulnerabilities created by energy shortages.
Here is the link to Helen Peck's excellent study:Wrong link and refer Post 13 for actual link.

Her study is very thorough (about 170 pages) but the most relevant info to our discussion here may be found in Section 1 (the first 20 pages)... well worth reading.

Last edited by davidbfpo; 07-05-2009 at 09:15 PM.
Reason: Remove wrong link and tidy up spacing.

The centralized electricity was out and we brainstormed solutions...I shared a trick I have seen which involves pulling a tire off a car rim, while the car is on blocks, and running a band between rim and pump to power the pump (run the car while its on the blocks)...

link to UK Food Supply Chain study

Sorry, folks

Surferbeetle alerted me to the fact that the link which I provided in posting #11 no longer leads to Helen Peck's study.
I'm not sure why, and that is unfortunate because it provided a concise intro which people could examine before linking to the study itself.

If high prices were sustained (prices would need to be sustained for at least a decade in order to achieve the following benefit) then more of the difficult oil would be brought on-stream, thus buying us some much-needed time to develop non-carbon alternatives.

I agree with this, except that if political risk issues are not addressed, even sustained high prices may not generate the necessary investment. Unfortunately there is very little anyone can do to mitigate political risks in Venezuela, Nigeria, Iraq, Iran, Russia, etc. No matter how high prices go, private capital will be reluctant to invest if they see a high probability of expropriation, harassment, major security threats, or government collapse. "Difficult oil" could refer to areas where extraction is expensive and technologically challenging or to areas where the investment climate is too risky to attract the money necessary to exploit reserves. The second problem may be more severe than the first.

Originally Posted by Rick M

But your final point about “an apocalyptic peak oil scenario where the oil simply runs out” makes me wonder if you share a common misconception about peak oil, which is to equate peaking with running out.

I'm aware of the distinction... however, much of the public discourse around the "peak oil" construct does really does take this apocalyptic vein, suggesting a rapid post-peak production decline that essentially equates to "oil running out". One popular and superficially analytical website (theoildrum.com) insists that June 2008 was "the peak" and projects an extremely abrupt and continuous decline in production thereafter. That's ridiculous of course, but people believe it, and as you suggest, perception is a large part of the problem.

Originally Posted by Rick M

Some peak oil analysts argue that the peak (ie. point of maximum production/flow-rate) should coincide more or less with the half-way point. That is, production will peak when we have extracted about half of the ultimately recoverable reserves.
Personally, I see no causal link between the two, nor did Brent Fisher in his excellent study for the Institute for Defense Analyses (IDA).

I'm with you and Fisher here, I also see no causal link.

Originally Posted by Rick M

But the central thesis of the peak oil analysts is this: the troubles will start as we approach the apparent peak. It probably will matter little what combination of factors ‘causes’ the peak, and we could have serious difficulties simply from the perception of a peak, even if the perceived peak should later prove to have been a false alarm.

This sums up my complaint with the "peak oil" construct: we have absolutely no way of knowing whether any given peak is "the peak" or simply "a peak", which renders the discussion extremely abstract. We also have no way of knowing, at any given point, whether we are approaching an apparent peak. I'd rather look at the problem as a function of production declines (you can't have a peak without a decline), whether transient or permanent, and the problems, both practical and perception-based, associated with declines.

Just as an example, the June 2008 peak is not generating any particular trouble because it is understood by all but the hysterics to be price-related, not supply-related, and because it came at a time of moderating prices and demand. A production decline at a time of escalating demand and prices would presumably have very different consequences.

Re rationing... I suspect that there's a plan or two, probably quite detailed, buried deep in the bowels of DC. Of course no politician wants to discuss such a scenario openly: the political risk is large and there is no political gain in raising the subject.

response to D's 4 points

Hi again, Dayuhan
Thanks very much for your detailed response.

I should pause at this point and thank you and the others for your interest in this topic…. This sort of discussion is exactly what I had hoped for, and everything that has been said so far (including the occasional bit of disagreement) has been constructive, sensible and respectful.

On to your various points:
1. I agree with your point that high prices still may not lead to investment in volatile regions. Given the volumes of accessible oil in the Middle East, your point makes this issue all the more timely… should Saudi Arabia (for example) become destabilized (or simply suffer a successful attack on Abqaiq and/or Ras Tanura), the global oil export system and the investment climate could be seriously and rapidly affected.

2. As for apocalyptic views of peak oil, I have tried to steer clear of the doomer/survivalist perspective and have repeatedly asked the mainstream media to do the same (since they seem to have difficulty simply explaining the data and the concerns without raising the apocalyptic aspect, which is not helpful).

I have dealt primarily with Energy Bulletin rather than The Oil Drum, but more for reasons of format.
I’m not sure what you are referring to at TOD specifically…
I am usually very pleased with the level of scholarship (ie. sourcing material and providing balanced conclusions) that I’ve seen so far.
As for June 08 being the peak, we’ll have to see.
Matt Simmons, whose work I greatly respect, still argues that production of crude oil (excluding NGL and refinery gains) peaked in 2005 at just over 74 mbpd.

3. On your point about the rear-view mirror (how will we know if it’s the real peak or another false alarm?), I think that Bob Hirsch has it right: he suggests that we view the peak more as a plateau and allow for up & down wiggles.
He suggests a range of 4% up and down, and that people not get worked up one way or the other by variations which occur within that range.
I think that’s good advice.
The flip side of that is that we have been within that 4% range for several years now, so Simmons may eventually be proven correct.

4. As for your final point about the US having a plan for fuel rationing buried away somewhere, you may be right, but if so, then that is probably bad news.
As the recent UK and Australian research stresses, government authorities at any level can only do what they are authorized to do.
If they are prudent, they will not only do their legislative pre-planning well in advance of an actual emergency, but they will also communicate this to the public.
In the case of the UK, the details of their Fuel Emergency plan are secret (presumably because it identifies Essential Users, which is bound to contested by those who feel that they should have been added to the list).

But the fact that their national legislation has been completely reworked and that authority to act has now been assigned to local government authorities has been highly promoted, presumably because they want the UK public to be well aware of these changes and to reduce the likelihood of legal challenges to this change in legislative authority.

If US authorities think that they can suddenly restrict citizens’ access to fuel without being challenged in the courts (and thus risk disempowering authorities just when they need to take effective action to prevent panic buying and hoarding), then they should think again.

That is exactly the scenario that planners in the UK and Australia have worked so hard to prevent, and it does require legislative changes and ongoing communication with the public and with lower-level authorities, little of which seems to be occurring in North America.

Thanks again for your insights on this topic... they are well-founded.

I should pause at this point and thank you and the others for your interest in this topic…. This sort of discussion is exactly what I had hoped for, and everything that has been said so far (including the occasional bit of disagreement) has been constructive, sensible and respectful.

The topic is interesting, though as with many interesting topics constructive, sensible, and respectful discussion is hardly the rule on the internet! Hope it stays this way...

Originally Posted by Rick M

2. As for apocalyptic views of peak oil, I have tried to steer clear of the doomer/survivalist perspective and have repeatedly asked the mainstream media to do the same

I wish you the best of luck in that quest, but it will be an uphill battle. Reasoned analysis fits poorly in a 30 second sound bite, and the apocalyptic scenario draws more attention than serious discussion.

Originally Posted by Rick M

I have dealt primarily with Energy Bulletin rather than The Oil Drum, but more for reasons of format.
I’m not sure what you are referring to at TOD specifically…
I am usually very pleased with the level of scholarship (ie. sourcing material and providing balanced conclusions) that I’ve seen so far.

I get the feeling that the material that is sourced and the processes that are applied to the data are selected with the goal of supporting a preconceived view. An example might be these charts:

Where the data selected to provide the mean and median projections seem selected to suppport the declining curve. All very well to say that "95% of the predictions sees [sic] a production peak between 2008 and 2010", but it is worth pointing out 95% of the predictions they chose to analyze see that peak occurring. Subjecting carefully selected and less than comprehensive data to rigorous analytical processes has become a very common thing, but conclusions reached through this process remain questionable.

One thing that seems consistently missing from discussions of production is the medium to long term impact of the 90s oil glut. The glut actually went well beyond the 90s: oil was below $20 by 1986. There was a brief spike around the first phase of the Iraq war, but the rapid drop after that only served to convince many producers that price rises were likely to be transient phenomena. As late as 2002 prices were still bumping along at the $20 level. By 2004 we were into a serious escalation, but it wasn't immediately recognized. The early stages of the price spurt were marked by peaks and troughs, and the rise was not fully acknowledged to be driven by a fiundamental alteration of the supply/demand equation until 2005/2006.

What that means, to make a long story short, is that for close to 20 years prices were either too low or price increases were perceived as too transient to support comprehensive investment in exploration and production.

The production increase from 2006 on seems to me to be largely driven by short-term measures aimed at improving and maximizing existing capacity, rather than serious attempts to bring new capacity onstream.

The production decline after mid 2008 seems clearly price related to me. OPEC reduced production quotas, but there's more to it than that: major producers in the middle east had been running flat out for over a year, and when prices tanked there was an obvious incentive to pull facilities off line for badly needed maintenance work.

Will add more to this later...

Last edited by Dayuhan; 07-07-2009 at 02:44 AM.
Reason: Hit the wrong button and posted before completion

Engdahl's theory looks to me to be as full of holes as a Dick Cheney hunting buddy (ok, a low blow, but hard to resist), but I haven't time to point them out...

Life's catching up, but to abbreviate an extensive argument:

As suggested above, I suspect that the peak we've reached over the last 5 years is less driven by absolute scarcity than by the limits of a production infrastructure constrained by two decades of underexploration and underinvestment.

Quite a few "analysts" point out that the price increases after 2004-2005 were not paralleled by production increases. The reason is simply that existing infrastructure had reached maximum output, and the time lag between the decision to invest and actual production is too extensive to allow higher prices to call up more oil overnight.

The GCC currently has about $300 billion worth of oil projects underway, aimed at raising production capacity by approximately 5mbpd. The Saudis have discussed adding another 2.5 above that, eventually raising their total capacity to 15mbpd. Some of these projects dropped to the questionable level as prices plunged, but with the fast recovery to today's levels I expect most of them to go ahead.

Note that this added capacity may not be used at any given time. The GCC has no incentive to produce more than demand requires, but they do see a real advantage in holding the bulk of the world's surplus capacity, and having the ability to use that capacity as they see fit.

Other areas are also raising capacity. Projects currently underway are expected to add 1.1mbpd in Angola. Caspian production could increase by up to 2mbpd if transport hurdles can be overcome. Libya plans to add 1.5mbpd.

Obviously none of this is guaranteed, but we are speaking here of up to 10mbpd potentially coming on line in the next decade. This is primarily a response to the recent price spike and the expectation of continued high prices, a response delayed by the reality that bringing new production onstream takes time.

There are other areas that have seen production declines, stagnant production, increases below capacity or underproduction due to political and security conditions: Venezuela, Nigeria, Russia, Sudan, Iraq, Iran, Equatorial Guinea. Some of these may stagnate or deteriorate further, but it is also possible that some will see significant production increases.

Of course there are areas where production is constrained by absolute depletion, particularly in the US, the North Sea, and Mexico (though Mexico could probably do more with additional investment and a lot less politics, and the US has sources it is not exploiting for environmental and political reasons).

The pattern of extended glut followed by abrupt shortage has ramifications on the demand side as well. One of the most striking comparisons of energy use in the developed west vs the emerging economies is in energy consumption per unit of gdp. Compare the US to China in this category, and the Chinese energy inefficiency is staggering. This is partly a function of early stage industrialization, but it's also because the physical and planning infrastructure underlying the Chinese boom was put in place during the oil glut, and built on the premise of cheap oil. The Chinese have seen exactly how vulnerable they are to price spikes, and I expect a very real effort to diversify and to improve efficiency. Demand will increase, but the pace of increase will slow.

In short: yes, there is a plateau, and yes, there are serious risks of shortage. Both plateau and risks, though, are primarily driven by political, security, and investment concerns, not by impending scarcity or the arrival of an abstract peak.

I shall return, like MacArthur... hopefully sooner, and with less company.

Export Decline, etc

Hi, Dayuhan
You have obviously thought a great deal about these issues and your observations are excellent.

Your choice of the Oil Drum entries by Sam Foucher is a good one to illustrate your point.
I must admit that I have difficulty understanding some aspects of both his graphs and his text.
In any case his focus seems to be on projections… anticipating the future, and I have little interest in the specifics of predictions.
His projections may be correct, in which case peaking is imminent.
His projections may turn out to be overly pessimistic, in which case the impacts may fall more on our children and grandchildren.
Personally, I am even more concerned that the burden may fall on them, so the timing of peak seems minor to me (apart from the fact that a later date affords us some valuable time to mitigate, though I doubt that North Americans would cooperate enough to make effective use of the extra time).

I agree with most of your points but the issue of oil-field depletion needs to be weighed against the potential increased production which you (correctly) listed.
I don’t think that I agree with your conclusion that our recent difficulties (possible plateau and attendant risks) are unrelated to arrival of peak. I think we are closer to peak than most mainstream analysts concede, and that the increased price volatility is a reflection of that.
I do agree that there was no impending scarcity when prices & demand peaked last summer.
I would like to consider your arguments a bit further before responding to them in detail.

Meanwhile, I should mention that my own thinking on energy security has shifted considerably over the years.
The larger Peak Oil issue was the initial focus… I wanted to learn whether it was BS or a legitimate concern. I am now convinced that it is the latter.
But both common sense and the work of Robert Hirsch, Jeff Brown, (Canada’s) Jeff Rubin and Chatham House (UK think-tank) all point toward export decline as a second and more imminent concern.
Third, both concerns then led to the issue of emergency planning (by government, not the personal/survivalist kind).

The last of these has been my primary focus for the past two years, but I would prefer to leave that aspect for now and return to the first two (PO and export decline).

Both topics are covered quite effectively in a UCSB lecture (undated) by a French analyst and by Jeff Brown, who was one of the first to raise the export decline issue.
This YouTube link takes a full minute to download and get rolling, but I believe it is worth examining:http://www.youtube.com/watch?v=O7h4V...layer_embedded

The feature presentation is by Jeffrey Brown (25:00 –59:00) whose analysis is in three parts:
1. Peak Oil (27:00 –39:00). Please note his point at 29:00 about the minimal difference to the timing of peak which results from having additional reserves. Also, at 37:00 he points out that in post-peak Texas, a surge in drilling did nothing to stem the decline in production. He asks a very good question at 39:00.

2. Export Decline (39:00- 57:00) Brown’s central point is that global oil exports could effectively be finished around 2030 (ie. a very serious problem). Meanwhile, most of the optimists are telling us that peak production is unlikely to occur prior to 2030 (ie. no need to worry for a few decades). Yet the difference between the two scenarios is radically different: a world which has just hit maximum production versus a world with no remaining export capacity. (The next 20 years should be very interesting, especially on the energy front, and there are many reasons for Defense analysts to get involved proactively.)

3. Electric Transportation: (57:00 - 58:45)

If people don’t have an hour to spend on this (which I can fully understand), I would encourage them to at least examine Brown’s 18 minute analysis of export decline (39:00 - 57:00).
If anyone spots something which they do not feel is credible, please speak up.

Your choice of the Oil Drum entries by Sam Foucher is a good one to illustrate your point. I must admit that I have difficulty understanding some aspects of both his graphs and his text. In any case his focus seems to be on projections… anticipating the future, and I have little interest in the specifics of predictions.

I don't fully understand how the Oil Drum site works... there seems to be content from a lot of different people, and I'm not sure what sort of vetting or editorial control goes on. I admit that I haven't looked all that closely: there are a lot of barrels on the Internet, and when I find a couple of rotten apples on top of one I tend to move on and look for another.

Predicting the future is an intrinsic part of the peak oil discussion: you can't talk about a peak without postulating a subsequent decline. One of the problems that I have with the projections on sites like Oil Drum is the radical divergence between the projections they cite and those that come from the big three of mainstream energy analysis: EIA, IEA, and OPEC. These institutions have access to all available data on production and depletion, and they have an abundance of analytical resources at their disposal. So why are their projections so different from those we see so often from the "peak oil" discussion? You almost have to postulate that the mainstream analysts are either completely incompetent or conspiring to collectively present baseless projections, and neither hypothesis sounds terribly credible to me.

Many years of working in the muddy ground between financial and political analysis has left me suspicious of sophisticated modeling processes, especially when they kick out results that seem questionable to me. I've seen too many people (especially in the financial world) use the sophistication of their models to validate their conclusions, conveniently failing to mention that cherrypicking the data you feed into the model will provide whatever result you want to produce. Torture the data enough and they will tell you whatever you want to hear.

I'm suspicious of the discourse claiming that the 2005-2008 plateau was "the peak" because too many alternative explanations for the observed phenomena are not considered. It has become almost a mantra in the "imminent peak" circle that from 2005 onward rising prices could no longer call up more production. The possibility that installed capacity had peaked and that high prices can call up production with a substantial time lag between investment and results, while obvious, is not discussed. Similarly, the downward production curve in mid 2008 looks terribly ominous until you put it up against a price chart, at which point the relationship becomes too obvious to ignore. All too often it is simply stated that mid 2008 marked the beginning of "the decline" in production, without discussion of the obvious connection between plummeting prices and production cutbacks.

Originally Posted by Rick M

Personally, I am even more concerned that the burden may fall on them, so the timing of peak seems minor to me (apart from the fact that a later date affords us some valuable time to mitigate, though I doubt that North Americans would cooperate enough to make effective use of the extra time).

I share this concern, which is one reason I feel that crying wolf over hypothetical peaks is a bad idea. If we announce a production peak and there isn't one, the public gets the impression that it's all hype and not an issue. The resource is finite and there will eventually be a peak. The only way I can see to maintain an impetus toward conservation and diversification is to keep prices high. The worst thing that could happen at this stage is another glut.

Originally Posted by Rick M

I don’t think that I agree with your conclusion that our recent difficulties (possible plateau and attendant risks) are unrelated to arrival of peak. I think we are closer to peak than most mainstream analysts concede, and that the increased price volatility is a reflection of that.

There may be a bit of circular logic here: we speculate that price volatility will accompany a peak, then cite price volatility as evidence of a peak. Of course a peak in production while demand is rising will create a price spike, but why should there be a difference between a situation driven by "a peak" and a situation driven by "the peak"?

We also need to consider that 2005-2008 saw intense price volatility across the commodities spectrum, not just in oil. Some of this was related to oil: higher energy costs drive production and transport costs up, and diversion of agricultural land to biofuel production did help to drive grain and meat prices up, but that's not a full explanation.

When I look at that period I see:

1. A rapid and generally unpredicted increase in demand across the commodities spectrum, primarily from East Asia, but this was a period of economic growth and demand growth around the world.

2. A substantial and rapid depreciation of the currency in which most commodity trades are denominated, supporting faster increases and creating an incentive to hedge the dollar with commodity trades.

3. The combination of inflated asset values and overextended leverage ratios created a vast pool of capital for speculation in commodities, and the rapid increase in commodity prices made such speculation attractive.

The extremely rapid spike in commodity prices in early 2008 and the extremely rapid plunge in late 2008 were too aggressive to be explained by supply and demand. The plunge in particular is very consistent with a liquidity crunch sucking speculative capital out of commodities.

I could go on, but suffice to say that there are many explanations for volatility that do not involve an absolute production peak.

I'm not trying to say that the idea of "peak oil" is BS - obviously it can't be. I do feel that the hype around the idea that the peak is imminent or recently past is baseless and may actually detract from rational planning.

Planning for abrupt scarcity is certainly necessary, but I think it's easier to justify that planning on the grounds of security and political risks than on the more nebulous grounds of "peak oil". Whether or not you believe an absolute production peak is near, the vulnerability of major suppliers is clear: I would rather argue that we need an emergency plan to deal with the possibility of a security crisis in the Middle East (Straits of Hormuz closed, instability in Saudi Arabia, nuclear confrontation... take your pick) than claim that we need an emergency plan because a production peak is imminent. It's easier to justify and the need is clearer.

Just thoughts and opinions, as always...

Steve

PS: Couldn't pull down the videos; I live on a mountaintop in the northern Philippines (while working primarily in Dubai - long story) and the connection speed is not up to it. Is there a transcript anywhere? I'd rather read than listen in any case...